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The State of the Recovery
Last Fall Development asked several national economists to give their comments on the shape of the economy, how commercial real estate developers and owners could position themselves and when the next market upturn would occur. Well into the recession a year later, we asked them to describe their view of the recovery.
| Franklin L. Burns School of Real Estate & Construction Management, University of Denver |
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| Goizueta Business School, Emory University |
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| Director, Center for Regional Analysis, School of Public Policy, George Mason University |
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| Chief Economist, Associated General Contractors of America |
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What track do you think the economy will take over the next six months? Over the next year?
Mueller: Most economists think we will see positive Gross Domestic Product (GDP) growth in 3Q09 while the more pessimistic think it will not come until 4Q09. Employment growth normally lags GDP growth by two quarters - thus positive net employment growth should begin in 1Q2010 or 2Q2010. Once job gains are net positive, we should see positive absorption in most cities across the U.S. by 3Q2010 or 4Q2010.
Fuller: The recession will end (GDP will turn positive) during the third quarter of 2009 and continue to gain strength slowly over the 4th quarter and throughout 2010. GDP will be negative for 2009, possibly as much as -3 percent and will only grow on the order of +1.5 percent in 2010. It will be 2011 before the economy will improve enough to generate sufficient job growth and bring the unemployment rate back to single digits.
Rosensweig: The real economy will continue to feel pain, even if it does bottom out within the next six months -- a bottoming which I see as quite likely. Federal Reserve actions saved us from a deeper plunge and set the stage for eventual recovery. I foresee a very low growth rate until later in 2010 at the earliest. The economy is more likely to be L-shaped with a slight rise on the horizontal leg, than V-shaped. Great pain will be felt in the job market, first because any economic growth will be below the three percent needed to stop unemployment from rising, second because unemployment does not start to shrink until well after the economy recovers. We saw this in the "jobless recovery" of 2002-2003.
Simonson: I expect GDP will stabilize in the second quarter, with small improvements over the next four quarters or more. I characterize this as a check mark-shaped cycle, with a steep drop last fall and winter followed by very gradual recovery, unlike the more typical V-shape. For many people, it will not even feel like recovery, because unemployment will keep rising until mid-2010.
What are the greatest threats to an economic recovery?
Mueller: High interest rates will dampen business expansion and the high debt of the U.S. government should eventually push interest rates up. High oil prices will also make it difficult to manufacture and transport goods, thus dampening demand as consumers do not have the money to buy at higher prices. Higher taxes may hinder new business development as investors do not want to take risks if they are going to give most of their profits to the government.
Fuller: Continuing financial uncertainty resulting from foreclosures and bankruptcies stemming from above 10 percent unemployment in 2010 and foreclosures and bankruptcies associated with failures in the commercial real estate markets.
Rosensweig: Greatest threats are: 1) some sort of political shock, particularly in the Middle East or in relation to North Korea which would negatively affect consumer sentiment, as well as consumer purchasing power if oil prices spike; 2) residential home prices have to stabilize; 3) something has to replace the CMBS market or commercial real estate will continue to suffer and cause a further leg down in the economy.
Simonson: The biggest threat is that growth will stall once the stimulus funds begin to wane. As always, there are also threats from international supply disruptions, but the threat level seems subdued at the moment.
What property sectors do you see as being particularly strong for development and investment? In what general markets?
Mueller: Due to declining production over the past two years, inventories have declined and many producers are now at low inventory levels and will have to begin to re-stock. Thus demand for industrial warehouse space may be the first to see demand recovery. When jobs return, demand for apartments should pick up as people stop doubling up in their living arrangements. Increasing employment in the U.S. economy should also improve demand for office space in late 2010.
Fuller: Apartments and eventually condos followed by moderately priced single-family housing.The residential market will recover in 2010 while non-residential construction will lag and not register gains generally until 2011.There will be exceptions with some markets and sectors recovering sooner and some lagging such as Los Angeles and other hard-hit economies.
Rosensweig: The Southeast remains an attractive market for investment given its favorable demographics and the now distressed pricing we see in that market. The best sectors will be direct beneficiaries from the fiscal stimulus, i.e., government and civil works programs. Multifamily could be a relative bright spot, given its strong cash flow position and the availability of Fannie and Freddie financing. Retail and hospitality will continue to suffer.
Simonson: In general, income-producing properties look like a bad bet for the next 12-18 months. The only exception is for small retail in areas where home building and home sales are in recovery, thanks to continuing population growth, i.e., Texas and areas around military bases getting additional troops or civilians. But most retail pickup will be from repurposing existing buildings, not greenfield development. Office, hotel, warehouse and multifamily properties look exceedingly weak.
How should commercial real estate developers and owners position themselves to weather the current cycle?
Mueller: Having as much cash on hand to be able to buy at low prices (either existing buildings or land) will be the best strategy. Also having debt available for these purchases (even with lower loan-to-value ratios) will be the other key to success.
Fuller: Cut costs, save money, retain tenants and workout financial solutions for hard-pressed but viable tenants and vendors. Look for bargains, especially well-positioned existing structures and development opportunities in markets with little new inventory available - close-in suburban markets are likely to recover faster than suburban and exurban markets. Survival tactics will be required over the next 12 to 18 months but the weak market conditions will produce opportunities for those with access to capital and willing to take the risk of being slightly ahead of the curve!
Rosensweig: Raise and sit on cash to prevent losing deals and to be able to borrow money. Non-performing loans for smaller assets are becoming attractive, with average pricing around 30 percent of the face of the note, which, on a low-levered transaction, can put a developer into existing assets at a low basis.
Simonson: Construction is a rare bargain today. Materials costs are dropping for the first time in six to seven years, and owners have their pick of skilled contractors willing to work immediately at little or no markup. This is a limited-time sale. A year from now, materials prices could be jumping again, many contractors will be out of business and their best employees retired or working in other industries or regions.
Given the current state of the economy, when do you forecast the next up-cycle?
Mueller: We should see occupancies bottom in mid-2010 and start a recovery in the second half of the year. Prices are another story, and the availability of credit will be the key to price increases. If the government programs do start to provide more credit availability to commercial real estate, then we could see prices turn around with occupancy increases, but prices could lag by one to two years and not increase until 2011 or 2012.
Fuller: The up-cycle will start nationally in the third quarter and will accelerate into 2013 or 2014, although the current forecast for 2014 suggests that it will not be as strong as 2013. The up-cycle for the commercial sector (new construction and value growth) will lag a year and should be generally apparent in 2011.
Rosensweig: Real estate in general should bottom within a year, but likely it will be 18 months before we start a significant up-cycle.
Simonson: Non-residential construction as a whole is not likely to improve until 2011, although there will be a pickup in 2010 in retail re-construction, possibly university and hospital work, power construction and stimulus-funded projects. Income-producing properties will start to improve in 2011, although some regions may not recover until 2012 or later.
Letting Go
In challenging times, finding a few moments of peace isn't always easy. For those in the Washington D.C. area, a blissful retreat has come on the scene. The sustainable roof of an eight-story office building near Capitol Hill at 10 G Street, NE in Washington, D.C. is home to a labyrinth. The project was a collaborative effort between building owner, American Psychological Association, the TKF Foundation, the Chesapeake Bay Foundation and the World Resources Institute.
An ancient tool for meditation, the labyrinth covers 3,600 square feet of the building's roof and is open to the public.
For more information
www.wri.org
Sunglasses for Office Buildings
The darkening ability of the SPD-Smart Glass transforms Indiana University's Legacy Boardroom without mechanical blinds. |
A product similar to transition lenses for eyeglass users is now available for commercial use. SmartGlass, the latest in large-scale variable tint technology is a product of Innovative Glass, a New York-based company, providing integrated electronic glazing solutions for conference rooms, boardrooms, network operation centers and other applications.
SmartGlass allows users to control the amount of light, glare and heat coming through windows allowing for increased energy efficiency. According to the manufacturer, the film has the ability to have its tint level and light transmission characteristics adjusted from less than one percent to over 50 percent in a matter of seconds using a simple wall switch or remote control. In addition to manual control, it can also automatically adjust its darkness according to environmental conditions, thus maximizing the efficient use of daylight to conserve energy. Glass produced with SPD-SmartGlass film is also said to block 99 percent of harmful UV rays entering the building.
For more information
www.innovativeglasscorp.com
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